Lithium, inc. is considering two mutually exclusive projects, a and

b. project a costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. project b costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. the firm's required rate of return for these projects is 10%. the net present value for project a is

Question

Business

Lilianna Burton

15 January, 18:11

Lithium, inc. is considering two mutually exclusive projects, a and

b. project a costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. project b costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. the firm's required rate of return for these projects is 10%. the net present value for project a is

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Yuliana Hudson · Answer 1

Missing question: Which project should be implemented based on net present value?

Solution:

NPV = - Co + C1 / (1+r) + C2 / (1+r) ^2 + ... + Cn / (1+r) ^n

Project A

NPV = - 95000 + 65000 / (1+0.1) + 75000 / (1+0.1) ^2 = $26,074.38

Project B

NPV = - 120000 + 64000 / (1+0.1) + 67000 / (1+0.1) ^2 + 56000 / (1+0.1) ^3 + 45000 / (1+0.1) ^4 = $66,362.95

The rule: The project with higher NPV is chosen for implementation. Based on the NPVs calculated, project B is the most viable.